German Regulators Oppose Fed Rule on Foreign Bank Oversight

Germany’s top two banking
regulators oppose a proposed Federal Reserve rule aimed at
compelling large foreign bank holding companies to hold more
capital and liquidity in their U.S. subsidiaries.

Bundesbank vice president Sabine Lautenschlaeger and Bafin
president Elke Koenig said in an April 26 letter to the Fed
board that “‘go it alone’ national initiatives can tend to
weaken the global setup and stability” of global systemically
important banks “instead of stabilizing them.”

The Fed’s proposal would affect Deutsche Bank AG, Germany’s
biggest lender, which last year dropped its bank holding company
status so that it could meet U.S. requirements without assigning
additional capital and liquidity to its unit in the country. The
German regulators’ letter is available on the Fed’s website.

Fed officials have signaled they are unlikely to back down
in the face of opposition because their experience in the
financial crisis showed that some of the biggest borrowers from
their emergency facilities were foreign banking groups in need
of dollar funding.

“The proposal is directly responsive to the
vulnerabilities in foreign bank activities observed during and
after the financial crisis,” Daniel Tarullo, the Fed governor
in charge of bank supervision and regulation said Dec. 14 when
the rule was proposed. “Many large foreign banking
organizations came to rely heavily on short-term, wholesale U.S.
dollar funding and thereby became subject to destabilizing
runs.”

Coordinated Supervision

The German regulators listed five points in opposing the
Fed’s proposed rule. They said international banking accords
call for coordinated supervision of internationally active
banks. The Fed rule puts that approach at risk and tends toward
“‘renationalizing’ supervision, which, in fact, harbors real
potential for supervisory arbitrage and global imbalances,” the
regulators said in their letter.

The rule will also have a “negative impact on
international cooperation since it does not take appropriate
account of consolidated supervision following comparable home
country standards,” the German regulators said.

“Solo approaches will not appropriately mirror the complex
risks taken by internationally active banks and will create a
conglomerate of fragmented supervisory approaches,” the letter
said, adding that European banks may have to reduce their
activity in the U.S. as a result of the rule.

Fed’s Proposal

The Fed’s proposal would require foreign banking operations
with global consolidated assets of $50 billion or more, and U.S.
subsidiaries with $10 billion or more in total assets, to create
an intermediate holding company, which would be required to
maintain the capital and liquidity standards applied to U.S.
bank holding companies.

The units would also be under supervision by the Federal
Reserve, the nation’s bank holding company regulator, face
stress tests, and be required to hold a 30-day buffer of
“highly liquid assets.”

Foreign banking organizations with global consolidated
assets of $50 billion or more would be required to meet the
standards on July 1, 2015.